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The concept of digital currencies has gone mainstream. Even though the concept of crypto has become a bit dated, it still spawns all sorts of new ideas.

The latest trend from the crypto world is crypto loans. This newfangled hybrid of lending and digital currency is gaining traction, for better or for worse. But is mixing personal loans and volatile cryptocurrency a good idea? And where can you even find crypto loans? This guide answers these questions and more.

What is cryptocurrency?

Cryptocurrency is a digital currency that aims to eliminate central bank dependency through publicly distributed ledgers known as blockchains. Electronic tokens and keys are traded via online exchange platforms.

In theory, crypto is the widespread, low-cost solution to many of our banking problems.

In practice, crypto is a volatile asset that is most commonly used for speculative investing. But that has slowly changed in recent years. More and more retailers are starting to accept cryptocurrency payments. And you can even pay taxes with it in some places.

As crypto grows in popularity (and utility), millions of Americans are keen to give crypto a try. Studies show that the majority of American adults — in fact, 56% of them — own or have once owned crypto. And around 41% of refusers intend to jump on the bandwagon soon.

There are even new ways to fund your investments, including crypto credit cards, a product that 61% of Americans have shown interest in. And now the next new thing, crypto lending, is coming.

What are crypto loans?

First things first, we will discuss what a crypto loan actually is. On the surface, it sounds like a personal loan that you use to buy cryptocurrency. But it’s a bit more complicated than that.

Crypto loans are secured loans offered by some crypto brokers and wallets. You use your existing cryptocurrency assets as collateral. In other words, crypto loans are secured loans that allow you to use crypto you already own to lower your interest rates and adjust your repayment.

Related: Best Crypto Apps and Exchanges

For example, a crypto loan allows you to borrow up to 50% of the value of your crypto deposits. You can use the borrowed money to invest in additional cryptocurrency. In some cases, you can withdraw the borrowed funds as cash to fund other personal or business purchases.

What are crypto flash loans?

Flash loans are a niche type of loan unique to the crypto market. They are unsecured loans that can be borrowed for a single crypto transaction. They are called flash loans because that is an appropriate description of their duration as flash loans must be repaid before the transaction ends. Flash loans are mainly used for arbitrage opportunities (when a crypto is priced differently in two markets at the same time). They are expert level tools and not for the average investor.

Is it a good idea to buy crypto with a loan?

This is the key question to ask yourself before getting a crypto loan. Because while the process has a few advantages, there are also a number of disadvantages.

Benefits of Crypto Lending

There are some advantages of crypto lending that might be attractive to some borrowers:

There is no credit check. Crypto loans are backed by your existing crypto and never exceed the value of that collateral. Therefore, in most cases you do not have to undergo a credit check. As long as you have an active wallet account with the exchange and enough collateral, you can qualify for the loan. This is in stark contrast to traditional credit, which is hard to come by without credit.

Interest rates can be quite low. For regular personal loans, a good interest rate depends on your credit rating and the terms of the loan. With crypto loans, your credit doesn’t matter. And because these are secured loans, they usually have relatively low interest rates. Some offer prices below 10%.

The time between application and funding can be hours. You will not be dealing with traditional banks or insurers. In addition, your loan is fully secured. This means you can go from application to approval to financing in the same day (although this can vary by lender).

Disadvantages of crypto lending

All loans have disadvantages, but crypto lending has a number of disadvantages that are unique as they are. Consider all of these potential issues before agreeing to a crypto loan.

You cannot touch your collateral. Any crypto you pledge as collateral for your loan is dedicated to this purpose. As long as you owe money on your loan, these assets are out of your direct control.

Interest accrues in dollars. Like any other loan, crypto loans also incur interest. And that interest is not based on the value of any particular crypto. If you are located in the US, a fixed exchange rate in US dollars will apply instead. And you must pay back any interest accrued as part of paying back your crypto loan.

There is often a low LTV (loan-to-value ratio). Most crypto loans have a fairly low LTV. We’re talking as low as 50%. So if you pledge $1,000 worth of crypto, you could end up getting a loan of just $500. With some lenders, you may be able to earn a higher LTV depending on what you do with the loan proceeds. However, expect higher interest rates for a better LTV.

When crypto prices fall, you need more collateral. Since you are using a volatile asset as collateral, there is a good chance that the value of that collateral will decrease over the course of your loan. If the value goes down, the crypto lender may require you to pledge additional assets to cover the difference.

Loan repayment terms can vary significantly. Some crypto loans can run more or less indefinitely as long as the value of your collateral is preserved. Other loans have repayment terms of hours, days, or weeks. Make sure you know how long it takes you to pay off your loan so you don’t get caught in a quandary.

Crypto is very volatile. We addressed that above, but it’s worth mentioning again. Cryptocurrency is not a stable investment. While there can be some very high highs, there are also extremely deep lows. Whether you’re talking about the value of your collateral or the value of investments you make with the money from a crypto loan, it’s all very risky.

Alternatives to crypto lending

There are two main reasons to take out a crypto loan:

  1. They want to keep investing in crypto.
  2. They want cash for something else.

If your end goal is to buy more crypto, be wary of alternatives. Anything that involves taking on debt or using assets to buy crypto carries many of the same risks as using any type of crypto loan.

But if you’re just looking for a loan for something else, such as For example, home repairs or investing in your business, some of these alternatives can be viable options.

Traditional bank loans

While not as en vogue as crypto lending, traditional bank lending is the tried and true funding method. As long as you have good credit, you can usually get decent interest rates and a consistent repayment schedule. Additionally, a personal loan from a bank is usually unsecured, so you don’t have to rely on your investments to maintain a stable value to keep your loan profitable.

Learn more: How do personal loans work?

The money from a personal loan is deposited into your bank account. From there, you can use it to fund whatever you need. If you’re going to use this to fund an investment, make sure you understand the risks involved. This goes double for a volatile investment like crypto.

peer to peer lending

This alternative to borrowing from the bank is a newer product — though not nearly as new as crypto loans. Peer-to-peer loans are essentially like traditional personal loans, except they are not funded by the bank. Instead, they are funded by people who essentially invest in the loan.

Related: The best peer to peer lenders

Peer to peer loans can sometimes be easier to obtain than traditional loans because the underwriting process is different. However, they come with the same risks as any other loan, including interest charges.

Credit cards without interest

For those looking to fund non-crypto purchases, a credit card with a 0% introductory APR offer can be extremely useful. You can shop with it like you would with any other credit card. The difference is that you will not earn any interest on your purchases during the intro APR period. (However, you must still make your required minimum payment each month.)

This method has a few disadvantages:

  • You need at least good credit. Most 0% introductory APR offers are on cards that require good to excellent credit to qualify.
  • The interest rate will reset to the go-to rate at the end of the introductory period. The default APR on a credit card is often very high, so be sure to cash out your balance before the introductory period ends.

On the other hand, if you are looking for a way to fund crypto purchases, this method may not be the answer. Here are some of the problems:

  • Capability: Some credit card issuers and networks prohibit using your card to purchase crypto.
  • Costs: Most crypto exchanges charge an additional fee to buy crypto with a credit card. There’s also the potential cash advance fee (below).
  • Interest: Your card issuer may count crypto purchases as cash advances. In this case, not only do you have to pay a cash advance fee, but cash advances are not typically included in these 0% APR introductory offers. In this case, you start earning interest at the standard rate immediately.

If you intend to use your credit card to buy crypto, make sure you know what you’re getting into. Before you buy, find out if buying is even allowed and how much it will cost you.

Learn more: Buy cryptocurrency with credit card

Credit Card Rewards

If you’re looking for ways to fund the purchase of more crypto, using your credit card rewards is probably the least risky. There are two ways to do this, depending on the type of rewards credit card you use.

The easiest way is if you have a crypto rewards credit card. In this case, your purchase rewards are usually automatically used to purchase the crypto of your choice. As with any other credit card, you can even avoid paying interest charges if you pay off your balance in full before the due date.

Related: Types of Cryptocurrencies

If you have a regular cashback rewards card, the process is a bit more complicated. In this case, you must withdraw your rewards. Then you can use that money to buy crypto through a crypto exchange. Choose an exchange that does not charge investment fees to get the most crypto for your money.

Richard Dement

The author Richard Dement